The ins and outs of manufacturing and what determines a final production cost.
Have you ever stopped to consider the ins and outs of manufacturing and what determines a final production cost? You’ve probably heard of all the major steps that lead up to a final product – research and development, formulation, testing, scheduling for production, organizing components, and finally production and filling. But most people don’t understand the major influential factors that determine the final unit cost in manufacturing. Manufacturing is rarely broken down and simplified so we are often left to our own assumptions when trying to understand how it all works.
It may seem oversimplified, but lets take it step by step. The four major factors that determine final unit cost are:
- Quality – What are we making?
- Volume – How much of it are we making?
- Components – What are we putting it in?
- Embellishments – How are we packing it?
It all starts with quality.
It all starts with quality. What are we working with? Are we working with very costly ingredients that make up a costly end product? Or are we working with less expensive ingredients? Take an example specific to the skincare and personal care industry. If we are manufacturing a conventional moisturizer that utilizes clean and standard ingredients, that would fall into the low to mid-tier cost category. Now take that formula and replace the ingredients in it with all-natural or all USDA Organic ingredients. The cost and quality of the product overall have now gone up significantly. The natural or organic version is higher in quality than the conventional moisturizer and thus more expensive to manufacture.
But it isn’t always the case that higher cost means higher quality. This is often true, but not always. Say for example we are creating a facial oil blend. We can blend oils that are commonly found in nature such as sweet almond oil, lavender oil, and rosemary oil or we can blend oils that are more costly to source due to high demand and short supply such as cannabis sativa seed oil and jasmine oil. The two oil blends are not different in quality, its just that one uses essential oils that are more easily sourced and therefore, less costly, while the other uses oils that are harder to source and therefore more costly.
Whether you are looking for high quality rare ingredients or commonly found ingredients, at the end of the day, the overall cost of your product boils down to the make-up of that product.
Volume– how much of the product are we making.
Volume– how much of the product are we making. This is arguable the most important factor in determining your final unit cost in production. Manufacturers work well with high volumes. Why? Because they use automatic filling machines that require higher volumes to operate. An automatic machine can eat 100 tubes before the alignment is perfect and its starts running optimally! They also purchase raw material in bulk and the higher order volume gets the better cost, which then trickles down to the final production cost. This is the same with packaging. When we custom source packaging for our clients, the larger the order quantity, the better the cost per unit, and that price break will be reflected in our client’s unit cost.
Its like the difference between shopping at restaurant depot versus your local grocery store – restaurant depot requires you to purchase more at once, but you end up paying less per unit than if you were to buy the same item at your local grocery store.
Sometimes clients are ok to pay a little more per unit in order to keep their quantity down. Large runs, especially for a first order, are scary for most people that are looking to private label or custom formulate a skincare or beauty brand for the very first time. Delving deep into inventory before you have a read on how the brand or product will perform can be nerve-wracking and feel like a risk. Here’s the trick: Always ask if there is an option to run production at a lower quantity with the understanding that cost may go up a little.
Another thing to keep in mind is that manufacturers have minimums they need to abide by too! Raw material suppliers and packaging suppliers have their own minimums in place that they require manufactures to follow. So if a manufacture tells you they cannot produce at a lower a quantity, this is likely the reason why.
Components – What are we packing it in?
Components – What are we packing it in? Is it a standard material like a plastic jar bottle or tube? Or is it a more elevated component with more costly material? The packaging says a lot about your beauty brand and product. It tells the story about who you are as a brand and about the product it holds. You want the packaging to be relevant to your target audience and you want it to represent your product well. In addition, you want to be sure that the material of your components is compatible with the materials in your product. They need to sit well together on a shelf. Glass and plastic are your basic options that will keep the cost down. But when you start looking for more customized shapes, colors, frosting, special molding, or specific materials, that’s when the cost will go up.
Embellishments – These are the final touches on the end product.
Embellishments – These are the final touches on the end product. Are the products going into a box that requires assembly? Do you have inserts you want included in the box? Are you looking for each unit to be labeled a certain way or shrink wrapped? Sometimes, these final touches will be handled by a third party fulfillment center, but many manufactures will offer these services as well. The embellishments, shipping, and handling charges will add up to complete the final unit cost. Keep these details in mind when you receive a production quote.